UK insurers motored higher on Thursday morning after ministers proposed a partial reversal of their changes to the measure used to determine personal injury pay-outs.
Back in March, the government cut the Ogden rate – which is the formula used to decide how much compensation should be awarded as a lump sum – to minus 0.75% from 2.5%.
Ogden rate initially cut in March
The thinking behind it is that those who receive their pay-out all at once can top up the amount by investing it, thereby reducing the amount insurers needed to pay out.
The formula assumed that claimants would put their compensation into government bonds, but with those bond yields falling into negative territory, the government ordered insures to pay a premium to victims to stop them losing money in real terms over the long-run.
Insurers were expecting the rate to be trimmed but labelled the new measures as “crazy” and blamed the changes for rising premiums.
READ: UBS juggles ratings for UK motor insurers after Ogden discount rate reduction
Government now backtracking
Following consultation, Justice Secretary David Lidington has backtracked slightly and suggested today that the rate would likely be bumped up to between 0% and 1%.
In other words, insurers would be back to paying slightly less in compensation, which should in theory lead to a fall in premiums.
Earlier this year, Direct Line Insurance Group PLC (LON:DLG) halved its dividend as operating profits dived by 23%, although without the £175mln hit from the changes, profits would actually have been 11% higher.
It was a similar story for Admiral Group PLC (LON:ADM) which saw its profits slashed by a quarter. Under the old rate, they would have up by around 3%.
‘Changes will take time to effect but good news for insurers’
ETX Capital analyst Neil Wilson welcomed the changes to the Ogden rate, adding that it’s a move that will be welcomed by both insurers and the NHS.
“While the industry was prepared for a change to the discount rate, it was a lot harsher than anyone had planned.
“Today’s changes won’t be applied retrospectively and will take time to take effect, but they should be cheered by investors.”
Direct Line shares jumped 3.7% in morning trade to 382.3p, while rivals Hastings Group Holding PLC (LON:HSTG) and Admiral both added around 1%.